Component Accounting Survey 2012

What components are being used?We expect that housing associations

have now concluded on the type and number of components. 67% of respondents are separating 6-9 individual components. This majority is slightly higher than at the last survey, which may be as a result of associations being further down the component accounting process.

Table one: types of components

0%

20%

40%

60%

80%

100%

Fenc

ingLift

Electr

ics

Mecha

nical

syste

ms

Bathr

oom

Kitch

en

Gas bo

ilers

Window

s and

doors

Roof

struc

ture

Main fa

bric

The trends in components are very similar to the previous survey with roofs, windows & doors, kitchens and bathrooms being the most popular components.

A number of respondents highlighted that ‘renewables’ (e.g. PV/solar panels & insulation) were being accounted for as separate components. This is likely to become more relevant in the coming years.

Rate of depreciation?The useful economic life (UEL) of components should be derived in conjunction with the asset management or replacement strategy of the association. The results of this survey have highlighted that there is generally a wide range of UEL for each component. For example, the UEL of

roofs varies from 25 years to 75 years across the responding population. The wide range of UEL reflects the differing replacement strategies applied by housing associations, which could be due to different types or ages of property or quality of the components fitted.

Table two: useful economic lives

0

20

40

60

80

100

120

140

160

Fenc

ingLift

Electr

ics

Mecha

nical

syste

ms

Bathr

oom

Kitch

en

Gas bo

ilers

Window

s and

doors

Roof

struc

ture

Main fa

bric

Maximum Minimum Average

The key points to note from the above analysis of UEL on components are as follows:• 70% of respondents will be

depreciating windows & doors over a period of at least 30 years, making this generally the longest life component outside of fabric and roof

• the spread of UEL on kitchens is not as significant as other components with 60% opting for the average life of 20 years

• bathrooms have generally been assigned a longer life than kitchens, with an average of 27 years compared to 24 years for kitchens. Some organisations are using a life as high as 35-40 years for bathrooms

• there is a high spread of UEL for ‘mechanical systems’ and a relatively low average life of 24 years, which could reflect that some associations include boilers within

Component Accounting Survey 2012

As we draw nearer to year-end and the adoption of SORP update 2010, housing associations across the sector are collating historic data for calculating the component accounting adjustment and assessing the impact on the financial statements.

We expect that the majority of housing associations will have now agreed a methodology for the adoption of component accounting and that finance & asset management teams will be well progressed in gathering data.

This factsheet setsout the findings from a survey carried out by Grant Thornton, to which there were 61 respondents who collectively own/manage over 400,000 properties. We have also used anecdotal evidence from discussions with our clients over the past six months.

this component and are weighting (shortening) the UEL accordingly

• there is a range from 50 years to 150 years in relation to the UEL of the main fabric, the average though of 90 years is as would be expected.

One potential implication of component accounting could be to increase the life of the fabric/structure, given that the shorter life components are now held separately. However, our survey results suggest that only 16% are expecting to use an increased UEL for the structure and the majority of these expect to increase the UEL by less than 10 years.

Impact of adoption?The adoption of component accounting is expected to increase capitalisation across the sector. However, to counter this, the annual depreciation charge is expected to be substantially higher. Our survey results have confirmed this expectation with 75% of respondents expecting to have increased capitalisation levels.

Table three: impact of prior year adjustments on reserves

Increase in reserves

Decrease in reserves

Don’t know yet

34%

38%

28%

81% of respondents to our survey are expecting a prior year adjustment to be required on adoption of component accounting.

There were a number of associations (28%) responding to our survey who are yet to conclude on whether the prior year adjustment would increase or decrease reserves. 38% of the respondents are expecting a decrease in reserves.

Adequacy of historical records?The main challenge on adoption of component accounting is the

availability of accurate historic data and the resulting impact on the calculation of the prior year adjustment.

Table four: years of detailed available data

1 - 3 years

4 - 6 years

7 - 9 years

10 years+

41%

11%

28%

20%

56% of respondents are expecting to experience difficulty in obtaining historic data. The effect of this is that over 50% have detailed records for less than 6 years.

The gaps in historical data will undoubtedly lead to assumptions and judgements being required to be made by associations in the calculation of the prior year adjustment. One potential implication would be the need to use external matrices or benchmarks. 50% of the associations responding to our survey are planning to use external matrices or benchmarks. The matrices are useful as a guide when less information is available, however the applicability of the information to the individual association must always be considered.

Resource implicationsIt is inevitable that the first time adoption of component accounting will have resource implications for associations.

Table five: has additional resource been required

Yes (consultants)

Yes (temporary staff)

Yes (internal staff)

No

28%

12%

12%

48%

The results of the survey have highlighted that a number of associations have invested in additional resource to produce the component accounting numbers. 52% of respondents required additional

resource and, notably, 40% of respondents used external resources such as consultants and temporary staff.

The majority of associations (81%) that responded to our survey are planning to maintain component data at an individual property level, which is clearly a detailed approach. This high level of detail is perhaps reflected in the estimation of the time to be spent on component accounting this year but also perhaps indicates a closer link to asset management and records going forward.

Table six: number of hours spent implementing component accounting

0 - 15 days

16 - 40 days

41 - 70 days

71 - 99 days

over 100 days

21%

16%

9%21%

33%

33% of respondents expected to invest over 100 days on this first time adoption of component accounting.

There may be a causal link between the fact that of those expecting to incur more than 100 days, 63% only had data going back 4-6 years and 68% were going to need to use external matrices.

In addition to the staffing implications, associations have been considering whether new software systems are required to manage component accounting in future years. 65% of the responding population have purchased new software systems.

Impact on loan covenants?Initially, one of the major risks expected on adoption of component accounting was whether there would be any implications for loan covenants. As expected, the proportion of associations that have had initial discussions with lenders has increased from 20% at the last survey to 66% in the current survey. Only 8% of the respondents had not yet had any discussion with lenders.

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Table seven: have loan covenants been affected by the adoption of component accounting

Yes

No

Not known yet

26%

48%

26%

Surprisingly 48% of respondents do not believe component accounting will affect loan covenants. This could be due to the number of cash flow based covenants in the sector or due to successful negotiation by associations with lenders regarding the impact of component accounting.

Other considerationsIn our experience, the majority of associations have an agreed component accounting approach and are a long way down the road to calculating the prior year adjustment (where applicable).

There have been two main areas of continued debate over the past few months, as follows:• Allocation of valuation – those

associations that hold housing properties at valuation have been considering the basis for allocating the movement in valuation i.e. is this to land, to land and structure or, in rare cases, to other components as well.

• Treatment of excess grant – those associations that have received high levels of social housing grant in the past have had to consider how to treat the excess when grant is higher than the cost of land and structure. The key consideration is whether to reallocate the grant across all components.

The SORP update 2010 leaves the above areas open for associations to apply, following discussion with their auditors, the approach that is most appropriate to their particular circumstances.

The next steps?As highlighted above, the adoption of component accounting is expected to require significant assumptions and estimates to be made by associations. We would expect the Audit Committee and the Board to review and approve these key assumptions and consider how sensitive these are to reasonable changes.

Once the component accounting adjustments have been finalised and audited, attention will turn to ensuring that the disclosures in the financial statements are adequate. We will include some suggested disclosures in our model accounts, due to be released in March 2012.

To discuss the contents of this factsheet or for more information please contact:

Jenny BrownHead of Housingjenny.m.brown@uk.gt.com

Arthur MerchantSenior Housing Adviserarthur.merchant@uk.gt.com

Geraint DaviesLead South West Housing contactgeraint.davies@uk.gt.com

Kyla BellingallLead Midlands Housing contactkyla.bellingall@uk.gt.com

Paul NaylorLead Anglia Housing contactpaul.naylor@uk.gt.com

Judith NewtonLead Central Housing contactjudith.newton@uk.gt.com

Graham NunnsLead North East Housing contactgraham.nunns@uk.gt.com

Toby WilsonLead North West Housing contacttoby.wilson@uk.gt.com